There’s been a lot of activity in the residential real estate and real estate lending markets over the past few decades. Home prices have spiked and fallen in many parts of the country, while foreclosures and similar proceedings are at or near record levels. Another significant development has been the rapid decline in interest rates, sending mortgage loan rates to all-time lows.
There is also a fair amount of misinformation surrounding many of the financing vehicles and programs available for residential real estate. Second mortgages in particular are a common source of confusion.
Here is some information and advice on some of the more common second mortgage myths and facts.
Myth: It’s Impossible to Get a Second Mortgage These Days. Fact: It’s true that lending standards have changed over the past few years. But banks are still willing to provide second mortgages if you are a strong enough borrower, and if you have enough equity available in your home.
Myth: Second Mortgages Aren’t Affected in Bankruptcy. Fact: The status of your second mortgage in any bankruptcy proceeding will depend on your individual situation, and the type of bankruptcy proceeding you’re under. But it is possible to have your personal liability removed on a second mortgage if there is no available equity on your home and you make the proper bankruptcy filings.
Myth: Don’t Consider a Second Mortgage Unless You’re Staying in Your Home For a Long Time. Fact: The decision to take out a second mortgage will depend on a number of different financial factors. One of these will be how long you plan to stay in your home, but there are many others. If the closing costs and the repayment interest rate are low, and if you have a good reason to be borrowing, then it might well be a good decision to take out a second mortgage even if there’s a chance you might move in several years.
Myth: Defaulting on a Second Mortgage is Less Damaging. Fact: Failing to pay your obligations on a second mortgage can be just as damaging to your credit (and put your home at risk) to the same extent as would failing to pay obligations on your primary mortgage. Your second mortgage will be secured by your residence, so the worst case scenario is that a default on that mortgage can result in a foreclosure proceeding.
Myth: A Second Mortgage is the Same as a Home Equity Line of Credit. Fact: A second mortgage is also known as a home equity loan, but this is not the same thing as a home equity line of credit. Second mortgages are fixed term loans, so that they are fully paid off by the end of the term. In contrast, home equity lines of credit are revolving loans, similar to a credit card. You can borrow money against the equity of your home as often as you like, up to a maximum amount. As you pay back the amounts that you borrow, you are then free to borrow again in the future.
The best way to avoid any surprises or get yourself into financial difficulty is to be well armed with good information. Once you know the facts about second mortgages you can decide if they’re the right thing for you.
There’s been a lot of activity in the residential real estate and real estate lending markets over the past few decades. Home prices have spiked and fallen in many parts of the country, while foreclosures and similar proceedings are at or near record levels. Another significant development has been the rapid decline in interest rates, sending mortgage loan rates to all-time lows.